Force people who made money from sub-prime mess to pay for it

Great Debates
61

hang on a sec, i think you’d be going after the wrong people.

Government lightly regulated the financial services industry and kept interest rates at artificially low levels for the last few years. People then took on too much risk and were too highly geared to property.

So the people who are to blame for the current mess are not the traders/bankers - they didn’t cause the problem - if people had saved some of their money instead of taking out a whacking great mortgage the US & some of western Europe wouldn’t be in the current mess.

62

So thieves aren’t the problem, it’s the police for not policing carefully enough and the victims for not locking up tightly enough? Oookay.

63

We can definitely call it the Golden Rule, considering that the Board of Directors of major corporations predominately have as members the CEOs of other major corporations. They’re treating other CEOs exactly as they want to be treated themselves. Isn’t that interesting? Of course they deserve these golden parachutes. They know first hand just how gosh-durn hard that job really is.

The family trees in the corporate world have even fewer branches than the most stereotypical Hillybilly family, and even the fact that these are elected positions doesn’t stop the incest.

64

but i don’t buy that comparison. A homebuyer leveraged more than 3-4x earnings is not a victim, they are the root cause of the problem. Somewhere down the line either they have to be kicked out of the house or the risk(debt) has to be spread across society. We are in this mess because people bought things they could not afford, pure & simple.

The police (SEC/Fed etc) let everyone run wild and we’re all going to pay the price.

65

Huh? You are saying regulation caused these issues? I’d be interested in seeing someone try to make that case.

Let’s just try the S&L blowup (bolding mine):

Not sure what you are asking here. Certainly I agree there is blame aplenty to throw around without regard to party. Business and politicians failed us massively.

66

The plan is to reward handsomely those who did the deed. Paulson was at Goldman for 30 years and has a net worth of 700 million dollars. We could take that for the first 10 percent of the new program. He claims he needs the money to save the system. Prove it by kicking in his share. He was a looter and now “trust me” I am now a savior. I do not trust these pricks a bit.

67

The Real Culprits In This Meltdown
By INVESTOR’S BUSINESS DAILY | Posted Monday, September 15, 2008 4:20 PM PT
Big Government:
Barack Obama and Democrats blame the historic financial turmoil on the market. But if it’s dysfunctional, Democrats during the Clinton years are a prime reason for it.
Obama in a statement yesterday blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the ‘trickle-down’ economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend. But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.
Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.
[ Removed excessive text. Do not quote entire articles, please. ]
Market failure? Hardly. Once again, this crisis has government’s fingerprints all over it.

68

Sorry, link: http://www.ibdeditorials.com/IBDArticles.aspx?id=306370789279709

69

The mortgage lenders incentivized people to make subprime loans even when buyers qualified for more. They also aggressively marketed these loans, both by advertising and by cold calling. Most ads said “bad credit, no problem.” Not to mention that borrowers didn’t hold guns to the heads of these people. Standard banking practice is supposed to be to lend to people with good credit - not to encourage loans without documentation.

Not to mention that the number of problem loans is fairly small, about 3%, and few would be a total loss. The real problem is that the clever bankers buried these bad loans in with good loans, so no one knows what the values of the instruments are so no one wants to buy them.

Discussion here has moved well past the “evil borrowers” phase. You might want to catch up on the real causes of the crisis.

You are right about the Fed though, since some states wanted to regulate lenders and the Fed wouldn’t let them.

70

We’ve been through that already. No, stopping redlining is not the cause of the crisis. These guys want to blame everyone but themselves.

71

It seems everyone is focused on the housing bubble and the cheap mortgages seemingly given away to anyone who wanted one. But as I understand it, this was only the catalyst that drove the real problem, which is the $45 trillion in credit default swaps being traded that defaulted. If you focus on the credit default swaps, the clear culprit is lax regulation driven by lobbying and a conservative economic philosophy of decreased government oversight.

72

OK, lesson time. What the hell are these credit default swaps I keep hearing about??? And while you’re at it, can you give me the first grader’s version of derivatives (which I assume are not the same ones that I studied over thirty years ago in calculus)?

73

Derivatives are financial instruments that derive their value from some underlying variable. For example, an option would give you the right to purchase an asset at a particular price at a future date. For example, say Acme Corp. is trading at $25 per share today and the 3 month future price is $35 per share. The cost of the option will basically depend on the market’s view on how likely it is that Acme reaches $35 a share within 3 months. If it’s not considered likely, the option will be priced lower. If you purchased such an option, and in 3 months the value of Acme stock is $40 a share, you can exercise the option at $35, turn around and sell it at the market price of $40, and net a quick profit of $5 per share (this ignores the cost of the option itself, which must be factored in as well).

As for credit default swaps, they’re sort of like an insurance policy. Say a bank makes mortgage loans. The borrowers have to pay the bank back, so this represents an asset for the bank. However, there is the risk that a percentage of the borrowers will default. The bank could purchase a credit default swap from another company to cover the risk of borrower default. The bank makes periodic payments to the seller of the swap, and if borrowers default, the seller pays out to the bank.

The problem is that these swaps had no regulation and they were not insurance. An insurance company is required to keep a certain amount of reserves available to cover any payouts on the policy it sells. Sellers of credit default swaps had no such requirement. Companies made a killing selling these when the real estate market was booming because there was little risk of default by the borrowers, and because there was no requirement to back the obligation with assets, multiple guarantees could be sold “insuring” a fixed amount of mortgages. Even worse, the swap agreements came to be viewed as assets themselves. Sellers would enter into swap agreements and then sell the rights to receive the payments to investors, even though there was no way of accurately valuing the things.

Everything started to unravel when the real estate market went south. The companies issuing the swaps or otherwise guaranteeing payment in the event of borrower default didn’t have the assets on hand to pay out. The large financial institutions that had invested in the swap agreements started to realize that they were worthless, and started to sue the issuers to compel them to put up the necessary assets.

There was an article linked yesterday that I’ll try to find, but the value of these swap agreements being traded was anywhere from $45 - $70 trillion. At the low end, this exceeds the value of the U.S. stock market. At the high end, it exceeds the GDP of the entire world.

74

Here’s the article:

http://www.dailykos.com/story/2008/9/21/9322/74248/245/602838

75

I more or less understand what a credit default swap is, but this is the part I really don’t get–how on Earth could this market be worth so much? $70 trillion is ten times the value of the entire US mortgage market.

76

Carl Icahn was interviewed on TV about finance CEOs. He said they are very likable. They are most likely the head of the frat in college. But absolutely not the sharpest guys . He would like to golf with them but not do business with them. He felt they were absolutely not the most highly qualified people around.
Paulson made more than 40 mill a year at Goldman. He has a net worth of over 700 million. Let him give up a half bill to kickstart the drive to save the country. If he believes it is as important as he says, then he and some others who got filthy rich should start the fund off.

77

See, that’s the other neat trick–CDSs are kinda like the mystery bag. They could be fulla dogshit, they could be fulla Krugerrands but there’s no way to tell, really.

Let’s say we have this guy who has a bunch of subprime mortgages that we say have a face value of 1 million bucks–ten mortgages of 100,000 each. So as long as the houses really are worth a hundred grand each, we can all agree on the value.

But it gets funner–the mortgages are ARMs and have a variable value according to what the prime rate is, so one day someone can make the case that they’re REALLY worth 1.5 million because the interest is up, and convinces someone else to buy the bundle at that price, whee!

Then the real estate market goes up so the guy who bought it at 1.5 says “dude, those houses are now worth 150 grand each, plus the higher interest makes this bundle worth 2 million!” and somebody else buys it for that.

See our problem here? Something that had a backable value of a million bucks is now considered to be 2 million worth of stuff–now watch the housing bubble pop and the values go down to where the houses are only worth 50 grand each, and the interest rates fall so THAT money is gone and then a whole bunch of defaults happen so the bet they all made that the original mortgages were gonna pay off is gone and suddenly somebody spent two million bucks for a wad of toilet paper and the only thing there is to back it up is ten shitty houses worth a buck eighty five each.

See? Mystery bag–buy my bag that I say is very good and maybe you’ll make out or maybe you’ll have a lapful o’dogshit, but no way to tell until you buy it. Since the “values” are arbitrary and are just based on whatever you can con some other sucker into paying, the “value” keeps inflating beyond any sort of reason, but they kept on doing it because nobody wants to be holding the dogshit bag when the music stops. Multiply that by a pantsload, then figure in that those companies that bought shitloads of those derivatives swapped perfectly good real assets for toilet paper and you have a big fucking mess. Now the government wants us to buy those wads of toilet paper at the premium price the fools who have it now bought it for, never mind that it will never be worth even the initial face value unless there’s a fucking miracle. So the government trades good money for used bumwad, Wall Street gets rid of used bumwad in favor of good money, we get stuck with the bill and there’s no guarantee this will even work. If we trade off enough cows for magic beans we’re gonna be fucked and the government will have to print money to keep us from being assraped by high interest loans from other countries who already own our butts. It will NOT be pretty.

I’d really rather concentrate on making those bad loans worth more by stabilizing the market on the ground, getting dodgy loans rewritten into something that will keep the foreclosures from happening. Even though most people hate the idea of “helping out the lazy and stupid,” every foreclosure averted is a percentage point added to the value of surrounding houses. A real estate rule of thumb says you can take one percent off the value of your house for every foreclosed property within a mile of you. It stabilizes the real estate market to keep foreclosures to a minimum, and it’s better to fix a bad loan product than it is to buy the derivatives of a whole shitload of bad loan products. The only people hurt by this kind of bottom up relief is the shitbirds who did it in the first place.

78

Have to admit I’ve only read, and heard, the plan in snippets.

But please challenge me on whatever I’ve missed or what I don’t understand.

  1. Fed has $700 billion facility to buy mortgage-backed securities in a reverse auction.

  2. Meaning, they open up the window and say ‘We’re buying!’.

  3. Bank A thinks some homogeneous portfolio on their book, held-to-maturity, is worth 70 cents on the dollar. Bank A asks for 80 cents from the Fed. The Fed says ‘Thanks for the bid, we’ll see what others who have similar portfolios are willing to take.’

  4. Bank B has a similar portfolio and bids 79 cents. Bank C bids 78 cents. Bank D bids 77 cents.

  5. Etc., Etc., until a clearing price is found. Call it 70 cents.

  6. This is good because the portfolios were trading anyway in a frozen market, and if Bank A, B or C was forced to sell right now it might have only been able to scare up 1 or 2 bids in the 20-30 cent range.

Then everyone else would have had to mark-to-market at 20-30 cents. With corresponding impacts on capital requirements.

  1. Fed is opening this up to lots of banks, including ‘good banks’ who don’t have to sell, to foster more liquidity and more accurate price discovery. This is the part I’m a little unclear on at the moment. If anybody has more details I would appreciate it.

  2. Results: If it’s true market price discovery, $700 billion spent should end up breaking even in the long run anyway, with no loss to taxpayers. Could be a little downside, could be a little upside, depending on how the book performs over time.

And maybe if this whole things blows over the Fed could sell the book back into a liquid, open market to get the stuff off their books. Banks unload bad stuff at ‘true’ held-to-maturity market prices, and can get back to bidness.

Sounds reasonable in theory, anyway. I missed a bunch of the testimony. I also probably missed a bunch of other details. Any new news?

79

SmartAleq laid down a shitload of knowledge for us.

80

We can not forget that the finance institutions were leveraged at about 30 to 1. They loaned out or bought up spending almost every dime. If things went wrong the had no reserves. Things went wrong. That is bad and reckless management.